1H22 results in line with our expectations

Sunline Tech (Sunline) announced its 1H22 results: Revenue grew 38.4% YoY to Rmb682mn; recurring attributable net profit turned positive YoY to Rmb3.16mn from -Rmb2.06mn a year earlier. For 2Q22, revenue rose 25.6% YoY to Rmb405mn, and recurring attributable net profit turned positive YoY to Rmb14.78mn from -Rmb5.54mn a year earlier. Results are in line with our expectations.

Trends to watch

Digital finance and big data businesses drove revenue growth; GM under pressure due to COVID-19. 1) Revenue: Implementation and acceptance of digital finance and big data projects continue to progress. In 1H22, revenue from digital finance rose 51.2% YoY to Rmb406mn, and revenue from the big data business grew by 28.9% YoY to Rmb228mn, boosting Sunline’s revenue. Its financial management value chain business generated revenue of Rmb48mn, increasing 0.72% YoY. In particular, overseas revenue soared around 47% YoY. 2) Gross margin (GM): The resurgence of COVID-19 delayed project progress, affected revenue recognition, and created costs for staff quarantine and control as well as personnel redundancy. All these factors pressured Sunline’s GM, which did not return to levels prior to its cooperation with the big banks. In 1H22, its GM dropped 2.43pct YoY and 2.74pct QoQ to 39.5%. For 2Q22, GM increased by 1.70pct YoY and fell by 0.96pct QoQ to 39.1%. By business segment, GM of digital finance equaled 43.4% (dropping 4.0pct YoY), big data totaled 35.4% (down 0.2pct YoY), and financial management value chain was 25.6% (down 8.5pct YoY).

Core system for Postal Savings Bank of China sets benchmark for large bank projects; the firm’s products are competitive in overseas markets. 1) Domestic business: Sunline has successfully pushed forward its cooperation with large banks. For example, the new-generation distributed core system for individual clients jointly developed by Sunline and Postal Savings Bank of China was put into operation. It represents the first time a large domestic bank has adopted a distributed core system, and we expect it to set an example for the industry. The firm’s cooperation with city commercial banks remained stable. Its new core systems for Yunnan Hongta Bank and Haixia Bank of Fujian officially came online. It is the first time a domestic city commercial bank has adopted a domestic distributed database and cloud platform. 2) Overseas business: The firm has operated overseas for six years. Its ICORE system has achieved a bid-winning rate of over 25% in the Southeast Asian market. We believe it shows the competitiveness of the firm’s products overseas.

Market demand may be further released in 2H22; watch cost control. In 2H22, we expect the implementation of China’s pro-growth policy to ramp up market demand. Project contract signing, execution and revenue recognition may gradually recover, driving revenue growth. We expect the firm to further fine-tune its management and implement a strategy of determining a revenue-based budget, as staff quarantine and personnel redundancy have driven up costs in 1H22. These efforts may positively impact full-year GM, and we suggest paying attention to the firm’s cost control.

Financials and valuation

Due to the high demand generated by import substitution, we raise our 2022 and 2023 revenue forecasts by 4.4% to Rmb2.03bn and by 7.2% to Rmb2.54bn, and attributable net profit forecasts by 17.1% to Rmb189mn and by 8.5% to Rmb274mn. As sector valuation remains relatively low, we maintain an OUTPERFORM rating and a TP of Rmb14 (37x 2023e P/E), offering 45% upside. The stock is trading at 26x 2023e P/E.

Risks

Uncertainties in construction and delivery of IT system projects for large banks; disappointing progress in overseas expansion.